March 24, 2016

Joint overlapping educational conferences hosted by the Society of Settlement Planners (SSP) and the Academy of Special Needs Planners (ASNP) March 9-12, 2016 in Tucson, Arizona provided S2KM and other attendees an opportunity to evaluate the current status of structured settlements within the larger, more complex personal injury settlement planning market. The SSP conference also transferred association leadership from Neil Johnson to Joe Tombs with Tombs promising to maintain Johnson's leadership direction and to "pull SSP back completely from structured settlement politics."

Among S2KM's conference conclusions: Many personal injury settlement planners characterize structured settlements as a strategic product, and recognize new marketing opportunities for structured settlements resulting from recent legislation such as the Affordable Care Act and the ABLE Act . The traditional and collective structured settlement industry should similarly embrace an important opportunity to grow its premium volume in this larger, more complex, more dynamic market than it has in the past by more effectively:

DISCLAIMERS: Because of overlapping conference schedules, S2KM was able to attend only three ASNP presentations but did receive and has reviewed all ASNP conference handouts. S2KM's Managing Director, Patrick Hindert, testified as an expert witness in the Mraz case concerning structured settlement and QSF issues on behalf of Adriana and Addison Mraz.

S2KM COMMENTS AND RECOMMENDATIONS

SSP Leadership

In his closing message as SSP President, Neil Johnson continued to emphasize several positive themes including industry unification and increasing collaboration between SSP and NSSTA. Among Johnson's proposed solutions for industry unity: 1) recognizing and accepting product diversity; 2) focusing on client and customer service; 3) identifying and pursuing permanent shared interests without necessarily agreeing on all issues; 4) engaging all perspectives to discuss industry problems and issues; 5) improving relationships among stakeholder groups; 6) promoting and practicing settlement planning not settlement selling.

Newly elected SSP President Joe Tombs promised to "maintain the direction of Neil Johnson's leadership and even accelerate it in every way possible." He identified the following "main themes" for SSP going forward: "to pull completely back from structured settlement “politics”, redouble our efforts at educating our members and promoting a Code of Ethics, and a membership push to quadruple our high water mark for number of members. We intend to actively encourage our members who sell structured settlement to join and to become actively engaged in NSSTA. We will continue to offer a hand of friendship and cooperation in their agenda although we will be decidedly apolitical. We will also make no attempt no manage our member’s opinions or their expressions of their opinions."

As for structured settlements, Tombs stated: "we intend to emphasize comprehensive settlement planning which will have the natural result of de-emphasizing structured settlement annuities to some extent as we move alternatives including trusts, taxable annuities, investment accounts, etc. closer to the forefront. We will be increasingly product-neutral and more advice-driven and client-need-focused in the future."Note: despite Tombs' assertion, and perhaps somewhat counter intuitively, multiple SSP conference speakers maintained that settlement trust sales, in particular, have actually increased their sales of structured settlement annuities.

Tombs also promised "to intensify [SSP's] efforts to stave off any further “infiltration" of our society by factoring companies and their employees. We will want to remain abreast of the goings on in that market as we have always attempted, but as a practical matter we are cutting off any new members or sponsors from that side of things."

Although NSSTA has made reports of all three surveys available to its members, and featured presentations about Part 1 and Part 2 at previous NSSTA educational conferences, NSSTA has not yet featured its Part 3 survey of plaintiff attorneys as an educational conference presentation. NSSTA has also prioritized "rejuvenating defense programs" as one of three preliminary "Growth Initiatives" with no equivalent current Growth Initiative focused specifically on plaintiff attorneys or personal injury settlement planning.

Less than 25% are likely to have a client sign a letter acknowledging that they were exposed to the opportunity to structure a portion of their settlement before opting for an all cash settlement.

Although 89% believe they "have adequate knowledge of structured settlements so that [they are] able to recognize when they would be in the best interest of an injured party...", only 28% said they suggest a structured settlement for cases involving Medicare set-asides (MSAs).

Only 26% have ever structured their fees.

Settlement Planning - A Special Needs Perspective

Most presentations by special needs attorneys at structured settlement conferences focus exclusively on special needs trusts. As one result, many structured settlement professionals fail to understand the broad and expanding scope of special needs planning - or how it impacts, overlaps with and differs from personal injury settlement planning. A similar misconception exists among special needs attorneys many of whom identify financial and insurance settlement planners exclusively with structured settlements. The title of the one joint SSP/ASNP presentation in Tucson ("Structured Settlements and Special Needs Trusts") re-enforced this misconception. Fortunately and positively, the actual presentation discussion, moderated my Jack Meligan and featuring Frank Johns and Joe Tombs, addressed a broader agenda.

Separately, both the ASNP and SSP conferences featured multiple presentations which captured the expanding expertise of their respective members. For structured settlement professionals, S2KM found ASNP's two "Pre-Session" presentations ("The ABCs of Public Benefits" by David Lillesand and "The ABCs of Special Needs and Settlement Planning" by Kevin Urbatsch and Michele Fuller) especially informative. Also recommended for structured settlement professionals seeking a more comprehensive understanding of special needs planning: Blaine Brockman's presentation ("Recent Trends in Special Needs Planning"),

Urbatsch and Fuller speak and write frequently about personal injury settlement planning and are recognized as leading national settlement planning experts among special needs attorneys. Their settlement planning presentations frequently discuss structured settlement "issues" - often with negative connotations and without rebuttal or explanations from structured settlement experts. What follows are structured settlement "issues" Urbatsch and Fuller identified in Tucson. In S2KM's experience: 1) many special needs attorneys agree with these issues; and 2) structured settlement proponents need to proactively respond to these issues - or risk continuing/increasing loss of potential annuity premium:

"Income stream is inflexible and cannot respond to emergency or major cash needs;

"High initial fees;

"Investment returns nearly always lower than what a diversified portolio would produce;

"Big ticket items, such as a home, cannot be easily acquired;

"Unscrupulous settlement planning brokers over-structuring because of high commission;

The Grillo case, which establishes potential legal liability for plaintiff attorneys who do not advise their clients about structured settlements, was the subject of an SSP conference presentation by Craig and Josephine (Grillo) Sullivan. The Sullivans shared the remarkable life story of their daughter, Christina, the Foundation she inspired and the Texas State Statutory amendment her case helped to enact.

For structured settlement brokers and settlement planners, the Grillo case provides a logical starting point for discussing structured settlements with plaintiff attorneys. As a point of comparison, consider response #5 above under "Marketing Feedback - NSSTA Survey of Plaintiff Attorneys."

Another important settlement planning "takeaway" from the Sullivans' SSP presentation: both Craig and Josephine emphasized the value of Christina's original life care plan which served as a care management "roadmap" throughout Christina's life accurately predicting future needs and developments which the Sullivans would not otherwise have anticipated.

This important observation, provided by the only care givers to appear as speakers at the combined SSP/ASNP conferences highlights an important settlement planning issue: Why do other settlement planning professionals ignorelife care planners - especially considering their strategic role defining "future needs" for personal injury damage analysis, as well as future expense allocations for Medicare set-asides and Affordable Care Act coverage? For examples:

As leading nurse life care planner Wendie Howland stated in this 2014 S2KM interview: "I have never been asked to review a settlement plan to see how well it matches my recommendations."

"Comprehensive" settlement plans S2KM has reviewed typically don't include any life care plan, or other document, providing a detailed "needs analysis".

With the exception of the National Alliance of Medicare Set-Aside Professionals (NAMSAP), a majority of whose members are life care planners, none of the many structured settlement or settlement planning conferences S2KM has attended during the past several years has offered specific presentations addressing the topic of "needs analysis" - or, with rare exceptions, featured a life care planner as presenter.

Key related issues: 1) what does "needs analysis" mean in the settlement planning context? Who is qualified, if not life care planners, to provide "needs analysis" for settlement planning? What is the relationship between a life care plan prepared for trial (damage analysis) and a life care plan for settlement planning? Who, besides a life care planner, is qualified to transpose one to the other?

The Mraz Case

The traditional objective and responsibility for plaintiff attorneys in personal injury cases has been to obtain the largest amount of compensation for their clients whether by judgment or settlement. By this standard, the law firm Lief, Cabraser, Heimann & Bernstein was notably successful in obtaining a $55 million verdict and subsequent $24 million settlement in 2009 against Chrysler in the Mraz wrongful death case.

Settlement planning, in general, and structured settlements, more specifically, however, prioritize an additional set of objectives and responsibilities for plaintiff attorneys. As a result, when the Lief, Cabraser law firm failed to obtain a structured settlement for Addison Mraz, the minor daughter of the deceased, after her mother, Adriana Mraz, allegedly requested Lief, Cabraser to obtain a structured settlement on Addison's behalf, Adriana brought a lawsuit alleging Lief, Cabraser attorneys breached the duty of care they owed to Addison.

On December 22, 2015, among other findings, a California trial court jury determined Lief, Cabraser attorneys did not breach the standard of care or any fiduciary duty they owed Addison Mraz. Nevertheless, unrelated to damages associated to the loss of the structured settlement, the jury awarded Addison Mraz $400,000 of fees and costs she previously paid to Lief, Cabraser. The case is currently on appeal.

Mark Wilson, the attorney who represented Adriana and Addison Mraz in their lawsuit against Lief, Cabraser, was a featured speaker at the SSP conference. Based upon the Marz case, and regardless of what occurs on appeal, Wilson highlighted the following structured settlement responsibilities as potential duties of care for plaintiff attorneys and recommended that structured settlement professionals and settlement planners utilize CLE programs to educate plaintiff attorneys about their potential liabilities. Plaintiff attorneys should:

Educate themselves about structured settlement issues including how to avoid constructive receipt as well as the appropriate utilization of QSFs and non-qualified assignments.

If and when necessary, know how to correct mistakes to preserve or re-establish their clients' structured settlement options.

Plaintiff Broker Diversification

The most successful plaintiff structured settlement brokers appear to be diversifying their products and services. It works, according to SSP speaker Anthony Prieto, "because it changes the conversation from a marketing perspective. There are a lot more people who want to talk to me about updates in MSP compliance or lien resolution than structured settlements. You see more cases when you offer other services. You become a problem solver as opposed to a problem identifier."

Consistent with the themes of "diversification" and "changing the conversation", John Darer made a convincing case for "transition expertise" as a critical settlement planning skill.

What potential professional liability issues accompany plaintiff broker product and service diversification? The SSP conference did not directly address this issue comprehensively.

Speaking about "ELNYandFactoringIndustry Lawsuits", attorney Edward Stone asserted that the "New Normal" (i.e. personal injury settlement planning) will not work if the core product (i.e. structured settlements) does not work. Focusing specifically on structured settlements, Stone asked whether a broker (plaintiff and/or defendant) owed any duty of care - and to whom? Also whether split commission arrangements changed the analysis? Based upon ELNY, he offered several related lessons for settlement planners.

Insurance law expert David Childers provided SSP conference attendees with a traditional analysis of standards of care and duties of care for insurance brokers, agents and producers under Arizona law.

CONCLUSION: Personal injury settlement planning is a large, complex, dynamic marketplace within which structured settlements historically has represented a strategic, if arguably under performing, product. The traditional structured settlement industry has heretofore avoided the educational analysis and strategic association relationships necessary to help its "New Generation" membership successfully transition to the "New Normal". It remains to be seen whether, when and how successfully future industry leadership will figure out how to put old wine in new bottles. Based upon this year's joint SSP/ASNP conference (and mixing metaphors), it appears the "New Normal" train is already leaving the station with a diversified cargo of blended products and services.

September 09, 2015

The National Structured Settlement Trade Association (NSSTA) has previously announced an "Industry Growth Initiative" - "designed to identify opportunities to expand the use of structured settlements and bring those opportunities to the structured settlement marketplace" - which appears to focus multiple growth-oriented goals NSSTA president Michael Goodman identified during NSSTA's 2015 Annual Meeting.

Although the first progress report for its Growth Initiative will not occur until NSSTA's 2015 Fall Educational Meeting, expanded use by traditional stakeholders represents one logical priority - a priority which NSSTA highlighted during 2014 by commissioning CLM Advisors to conduct a three-part survey of senior claims executives (Part 1); front line claims professionals (Part 2); and plaintiff attorneys (Part 3).

S2KM has previously reviewed Part 1 and Part 2 of NSSTA's structured settlement survey - the results of which NSSTA has made available to its members, including S2KM. NSSTA and CLM Advisor representatives have also provided their own interpretive analyses of these surveys during prior NSSTA educational conferences.

This blog post discusses selected portions of Part 3 (Titled: "Plaintiff Attorney Survey of Structured Settlements") the results of which: 1) NSSTA has made available to its members, including S2KM; 2) neither NSSTA nor CLM Advisors has yet to discuss or analyze during a NSSTA educational conference. 130 attorneys participated in the Part 3 survey. Not every attorney responded to every question.

S2KM INTRODUCTION

Until the Weil lawsuit settled in 1996, defendants retained exclusive control of structured settlements. Many defense brokers, as well as their liability insurance company clients, historically have referred to unsuccessful sales as "cash outs". As a general rule, their professional interests in structured settlements have been narrowly defined and focused upon their own product to the exclusion of other settlement related financial and insurance products.

Regardless of case complexity, or the involvement of other settlement planning professionals, plaintiff attorneys continue to perform the following essential settlement planning roles:

Recognizing settlement planning issues which impact their clients;

Recommending appropriate settlement planning professional resources to their clients; and

Retaining ultimate responsibility for effectuating settlements.

For these reasons, plaintiff attorneys represent the primary marketing target for companies and professionals offering settlement planning services - as well as a logical priority marketing target for growing the structured settlement market.

To effectively analyze the growth opportunities and obstacles for structured settlements and structured settlement brokers from the plaintiff attorney's perspective, therefore, both need to be viewed (and surveyed) in a broader context - as subsets of, and participants in, the larger and more complex personal injury settlement planning market. Although the results of NSSTA's Part 3 Survey provide valuable marketing information, the survey questions neither attempt nor accomplish this more comprehensive objective.

This shortcoming is understandable - even predictable. CLM Advisors, which conducted all three of the NSSTA surveys, is an affiliate of Claims and Litigation Management (CLM) Alliance - "the only national organization created to meet the needs of professionals in the claims and litigation management industries". Perhaps as a result, NSSTA's Part 3 Survey has a defense-oriented, historic quality. Some of their survey questions use awkward or unfamiliar language ("ancillary products to structures"). Some important issues (fiduciary responsibilities) are only addressed obliquely. Other important topics (Non-Qualified Assignments; Qualified Settlement Funds; Affordable Care Act) are not addressed at all.

Borrowing a phrase from an excellent presentation titled "Marketing Attorney Fees", delivered by Spooner Phillips and Rebecca Metzger at NSSTA's inaugural Structures 202 Conference, and applying it more broadly, perhaps it's time for proponents of structured settlements to "change the conversation" when marketing to plaintiff attorneys.

NSSTA SURVEY PART 3 SELECTED RESPONSES WITH S2KM COMMENTS

40% of respondents stated low interest rates have not negatively affected their perception of structured settlements.

67% said factoring has no impact on their willingness to consider a structured settlement or that they are indifferent to the factoring industry.

S2KM Comment: These findings should encourage NSSTA members to re-think standard explanations for recent lackluster industry sales results. They also support two of the seven goals Michael Goodman has identified for NSSTA during his term as president.

89% believe they "have adequate knowledge of structured settlements so that [they are] able to recognize when they would be in the best interest of an injured party..."

Only 28% said they suggest a structured settlement for cases involving Medicare set-asides (MSAs).

S2KM Comment: Similar to NSSTA surveys Parts 1 and 2, Part 3 identifies a need and opportunity to educate all structured settlement stakeholders to the advantages of funding MSAs with structured settlements including their inherent cost advantage compared with lump sums resulting from current CMS regulations for calculating present values.

Less than 25% are likely to have a client sign a letter acknowledging that they were exposed to the opportunity to structure a portion of their settlement before opting for an all cash settlement.

S2KM Comment: Every plaintiff structured settlement broker and settlement planner who sells structured settlements should be familiar with the Grillo case and use it help educate plaintiff attorneys about their potential liability for not advising their clients about structured settlements.

40% said they felt obligated to introduce the idea of a structured settlement to a client if a case has a value between $101,000 and $500,000.

An additional 32% felt obligated for cases having a value in excess of $500,000.

S2KM Comment: Although there is nothing inherently wrong with utilizing case values to identify potential structured settlement cases, this approach represents a more traditional, defense-oriented methodology rather than a plaintiff-oriented, comprehensive planning methodology that attempts to match products to needs.

48% stated the most significant drawback of a structured settlement is lack of liquidity.

S2KM Comment: NSSTA and its members should carefully consider how to improve primary market sales by proactively addressing this finding based upon the following, previously highlighted finding: 67% said factoring has no impact on their willingness to consider a structured settlement or that they are indifferent to the factoring industry.

40% said they would use the defendant's structured settlement consultant.

Only 20% assume a defendant will be offering more money if a defense structured settlement consultant is present.

38% work with financial planners instead of structured settlement consultants - at least on some cases.

S2KM Comment: This feedback provide an excellent starting point for NSSTA and its members to think strategically about how to increase structured settlements sales within the larger, more complex personal injury settlement planning market.

Although somewhat circumscribed by a traditional, defense perspective, NSSTA's Part 3 Survey of plaintiff attorneys provides valuable information for re-positioning the structured settlement industry for additional growth within the personal injury settlement market. The findings support and supplement the goals for growth previously identified by NSSTA president Michael Goodman and should assist NSSTA's Growth Initiative Committee in formulating its strategic priorities.

February 05, 2011

Greenberg v. Commissioner (T.C. 2011-18), a January 24, 2011 Tax Court decision, highlights the risks and potential penalties for improperly reporting the tax consequences of a settlement and provides a warning for advisers, including structured settlement and settlement planning consultants, who offer tax advice to recipients of settlement payments.

The Tax Court agreed with the IRS that Gary Greenberg failed to report the required portion of a $3.3 million bad faith and breach of contract award and imposed a substantial penalty for the underpayment.

Mr. Greenberg became disabled in 1990 and began receiving payments from a private disability income insurance policy he had purchased in 1988. When the life insurance company stopped making payments after eight years, Mr. Greenberg sued for insurance bad faith and breach of contract. An Arizona federal court awarded him $940,000 for past and future disability payments and premiums plus costs fees and interests. In addition, the court awarded Mr. Greenberg $2.4 million in punitive damages for a total of $3.3 million.

Mr. Greenberg failed to report any portion of the award on his tax return and did not otherwise disclose the award to the IRS. In Tax Court, Mr. Greenberg conceded the interest portion of his award was taxable but he argued that the $2.4 million of punitive damages should be received tax free "for personal injuries or sickness" under IRC section 104(a)(3).

The Tax Court disagreed and held that the punitive damages were not received "for personal injuries or sickness" and therefore constituted taxable income as did the portion of the costs and fees attributable to the punitive damages.

Gross income under IRC sections 104(a)(1)-(5) does not include amounts received for:

(4) - Government pensions & annuities ("as a pension, annuity, or similar allowance for personal injuries or sickness")

(5) - Terrorism injuries ("by an individual as disability income attributable to injuries incurred as a direct result of a terroristic or military action")

In Commissioner v. Schleier (1995), the U.S. Supreme Court implied that the language in each of the section 104(a) exclusion provisions should be read the same even if not written the same. In 1996, Congress specifically included punitive damages in a taxpayer's gross income under section 104(a)(2).

As a result, the Tax Court in Greenberg determined a large understatement of tax and imposed an accuracy-related penalty under IRC 6662. The penalty under IRC 6662 amounts to 20% of the underpayment attributable to a taxpayer's "negligence" or "disregard of rules or regulations" or "substantial understatement" of income tax. Significantly, Mr. Greenberg did not produce any evidence that he relied on professional advice nor did he make any relevant disclosures on his tax return.

For purposes of IRC section 6662:

"Negligence" includes any failure to make a reasonable attempt to comply with the provisions of the Tax Code.

"Disregard of rules or regulations" includes any careless, reckless, or intentional disregard.

A taxpayer is "careless" if he or she does not exercise reasonable diligence to determine the correctness of a tax return position contrary to the rules or regulations.

The penalty will not be imposed on any portion as to which the taxpayer acted with reasonable cause and in good faith.

A substantial underpayment of tax exists if an underestimate exceeds the greater of 10% of the tax required to be shown on the tax return or $5000.

The amount of understatement is reduced if there is or was substantial authority for the taxpayer's treatment of any portion, or if the taxpayer disclosed the relevant facts affecting the tax treatment and there is a reasonable basis for the taxpayer's treatment.

Based upon these rules, Mr. Greenberg probably would not have been able to avoid tax penalties simply by visiting with a tax adviser or making disclosures on his tax return. On the other hand, had Mr. Greenberg met with a competent adviser, he probably would have reported the income on his tax return and avoided the penalty.

The Greenberg case can be compared and contrasted with the Texas case of Grillo v. Pettiete. In the Grillo case, the defendants offered periodic payments (structured settlement) to settle a medical malpractice case. Although the case settled for $2.5 million, the plaintiff attorneys rejected the structured settlement. When the settlement funds subsequently were exhausted, the Grillo family sued the plaintiff attorney and guardian ad litem for negligence and legal malpractice. The parties settled for more than $4 million.

Both the Greenberg and Grillo cases highlight why settlement recipients need good professional advice. The Grillo case more specifically points out the potential risks for settlement advisers who give bad or incomplete advice.

Thanks to Jeremy Babener for alerting S2KM about the Greenberg case. Currently a NYU Tax LL.M. Candidate, and a former Fellow at the U.S. Treasury's Office of Tax Policy, Babener's writing appears on his website Tax Structuring and is featured on S2KM's structured settlement public policy wiki.